Thursday, 10 August 2017

Croplogic

When I first saw the Croplogic IPO I was
pretty excited. Lately ASX IPOs seem to have been an endless list of speculative
mining startups and suspicious Chinese organizations, so its nice to see a
company that seems genuinely innovative. Based on technology and crop
management techniques developed by the New Zealand government research
institute Plant & Food Research, the
company is looking to revolutionize the agronomics sector with various
technological and modelling-based solutions. This includes both patented
electronic monitoring devices that provide live soil moisture levels from the
field, as well as sophisticated modelling that allows farmers to predict
moisture levels and show optimal times for watering and fertilizer application.
The idea is that this technology will allow agronomists to spend less time driving
from field to field taking samples, while giving farmers a higher level of
service at the same time. The company has been around for five years, and has
completed a few trials with large multinationals. While they claim these trials
have been promising, they haven’t really amounted to much revenue as can be
seen by the meagre profit and loss report.

Croplogic is seeking to raise up to 8
million, with an indicative market capitalization of $23.9 million based on a
maximum subscription.

Strategy

One interesting things about
Croplogic is that they have decided to grow by acquiring established agronomy businesses
rather than organically (if you’ll excuse the pun.) This is based on the idea that
the agricultural market is suspicious of new entrants and values existing
relationships. Croplogic therefore intends to purchase
traditional agronomics businesses then slowly introduce Croplogic’s various
innovations to their customers. While I understand the thinking behind this (at
a previous role I saw first-hand a European fertilizer company fail spectacularly
in their expansion into Australia due to difficulties selling to suspicious
Australian farmers), there are a few factors that make me worried this strategy
won’t work. Post listing, Croplogic will have only around 8 million dollars
with which to buy the very specific type of company they are looking for (they
are specifically targeting potato agronomics companies) in the limited amount
of time they have before shareholders start getting impatient. With such
specific criteria and a limited amount of time, it seems a real risk they will
be forced to pay above market prices for the first suitable company they find.

Croplogic’s
most recent acquisition doesn’t really inspire confidence either. On the 28th
of April 2017 Croplogic acquired a company called Proag services, an
agricultural consulting business based in Washington state USA. Croplogic paid
$1.4 Million AUD, with another $1.25 million to be paid over the next few years
provided Proag’s revenue does not decline sharply. As a test case for
Croplogics acquisition model, the Proag purchase does raise a few questions.While in the financial year ending March 2016 the business made a profit of
$140,000 AUD, in 2017 this had reduced to a loss of $24,650 (to make things simpler,
I am using AUD for both the revenue and purchase price, despite Proag being an
American company). This loss was caused mainly by small a decrease in revenue
from 2.24 million to 2.14, and an increase in operating costs from $580,000 to
$690,000. To be clear, the FY17 financial year ended before Croplogic bought the
business, so these costs cannot be easily attributed to acquisition expenses. While
there could potentially be other factors that explain the 2017 loss, 2.65
Million seems hugely unreasonable for a company that lost money last financial
year, and even seems on the steep side if you just take the FY16 numbers into
account. Were Croplogic so desperate to
secure an acquisition before the IPO that they ended up paying more than they
should have for a struggling company? As an outsider it certainly looks like
that.

Management

One of the things I look for in an IPO
is strong founder with a real passion for the company. Bigtincan’s David Keane
and Oliver’s Jason Gunn are two great examples of this. In addition to being
good businessmen, both founders seem to have a real passion for their
respective companies and expertise in their specific industries. You get the
sense with both Jason and David that they have invested personally in their
companies, and will stick by them for as long as it takes.

In contrast, the managing director of
Croplogic Jamie Cairns has only been with Croplogic for just over a year and
has a background in internet companies. The CFO James Jones has been with the
company for even less time, and last worked at a private equity firm. While
they both seem capable enough, they don’t seem to be experts in agronomics, and
it’s hard to imagine either of them sticking around if they were offered a more
lucrative role at a different company.

Powerhouse
Ventures

The
largest Croplogic shareholder is the ASX listed Powerhouse Ventures, owning
both directly and through its subsidiaries roughly 20% of the Croplogic stock
post listing. I like to think of Powerhouse Ventures as New Zealand’s answer to
Elrich Bachman from Sillicon Valley. The company invests in early stage New
Zealand companies, most typically those that use technology developed in
connection to New Zealand universities with the hope that these can eventually
be sold later for a profit.

To
put it mildly, Powerhouse Ventures has not been going that well lately. Listing
originally for $1.07 in October 2016, the company now trades at around $0.55, following
problems with management, higher than expected expenses, and difficulties with
a number of start-up investments.

This
is a concern for any potential Croplogic investor, as one of Powerhouse
Ventures easiest ways to lock in some profits and generate cash would be to
offload their Croplogic shares. Considering the size of their stake in
Croplogic, this would have disastrous effects on the Croplogic share price.

Summary

As
you can probably guess if you’ve read this far, I will not be investing in
Croplogic. While the shares are undeniably being sold for a pretty cheap price,
their chances of success seem so small buying shares would feel more like
getting a spin on a roulette wheel than a long-term investment. When you read through
the prospectus, you get the feeling that the company is a weird miss-match of
various technologies dreamt up in Kiwi research labs that some over-excited
public servants felt would be a commercial success. Considering the minimal
progress that has been made in the last five years, they probably should have
stuck to writing journal articles.

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About Me

This blogs purpose is to answer a simple question: Can a normal investor tell a good IPO from a bad one? My goal is to review as many IPO's as possible and track my picks as I go. All opinions are my own.